TY - JOUR AU - Geske,Michael J. AU - Ramey,Valerie A. AU - Shapiro,Matthew D. TI - Why Do Computers Depreciate? JF - National Bureau of Economic Research Working Paper Series VL - No. 10831 PY - 2004 Y2 - October 2004 UR - http://www.nber.org/papers/w10831 L1 - http://www.nber.org/papers/w10831.pdf N1 - Author contact info: Michael Geske 817 South Main, Apt. E1 Ann Arbor, MI 48104 E-Mail: mgeske@umich.edu Valerie A. Ramey Department of Economics, 0508 University of California, San Diego 9500 Gilman Drive La Jolla, CA 92093-0508 Tel: 858/534-2388 Fax: 858/534-7040 E-Mail: VRAMEY@UCSD.EDU Matthew D. Shapiro Department of Economics University of Michigan 611 Tappan St Ann Arbor, MI 48109-1220 Tel: 734/764-5419 Fax: 734 764-2769 E-Mail: shapiro@umich.edu M1 - published as Michael J. Geske, Valerie A. Ramey, Matthew D. Shapiro. "Why Do Computers Depreciate? ," in Ernst R. Berndt and Charles R. Hulten, editors, "Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches" University of Chicago Press (2007) AB - The value of installed computers falls rapidly and therefore computers have a very high user cost. The paper provides a complete account of the non-financial user cost of personal computers -- decomposing it into replacement cost change, obsolescence, instantaneous depreciation, and age-related depreciation. The paper uses data on the resale price of computers and a hedonic price index for new computers to achieve this decomposition. Once obsolescence is taken into account, age-related depreciation -- which is often identified as deterioration -- is estimated to be negligible. While the majority of the loss in value of used computers comes from declines in replacement cost, this paper shows the second most important source of decline in value is obsolescence. Obsolescence is accelerated by the decline in replacement cost of computers. Cheaper computing power drives developments in software and networks that make older computers less productive even though their original functionality remains intact. ER -